2012/08/03 Banking Reform v1B Thirteen Points – passed by EWG to go to GA
The issues of banking reform are massive and often complex. Best ‘solutions’ in one area often depend on choices made in another and can vary over time. So many specifics are arguable. Most of these reforms deal with the short and medium term, which we have to survive before more thoroughgoing transformations for the benefit of the 99% (at least) can be trialed and developed. More is coming.
Banking reforms proposed by Economics Working Group, Occupy London
2nd banking document. The first was shorter. The next will be longer.
1. There is a spectrum of banking activities and a clear order of precedence among them. Global, EU and national regulations should reflect and reinforce this, encouraging banks to prioritise functions that are higher up the list. This order of priority is suggested as a guideline:
i. Safeguarding clients’ money and maintaining its value (both current accounts and savings);
ii. Maintenance of an efficient payment system and the safe, rapid and reliable transfer of money through it on behalf of clients;
iii. Loans which directly facilitate production and transactions in the non-financial economy (such as working capital and trade finance);
iv. Loans for business investment and to governments;
v. Loans for personal clients, including residential mortgages.
vi. Other business services, such as the underwriting of bond issues and advice on mergers and acquisitions; there is a case for taking much of the consultancy type of work out of banks’ hands altogether;
vii. Financial derivatives, including securitised loans.
2. New rules should be as simple and clearcut as possible, reducing thereby their susceptibility to future lobbying by banks.
3. Abandon the assumption that competition necessarily makes banking safer: 30 years of unrestrained competition in credit and derivatives led to the financial crisis. Competition between the types and quality of consumer service is acceptable. But other than that, competition encourages banks to take risks, which is against the interests of depositors. On the other hand, self-interested collusion between banks, such as occurred in the Libor scandal, must also be avoided. The safest banking systems pursue policies for their main elements (such as payment services and interest rates) that are agreed with the regulators. Managers should be required by law to pursue those policies and observe the highest professional and ethical standards.
4. Legally recognise a bank’s financial responsibility towards its depositors to be more important than its fiduciary duty to external shareholders. This responsibility should attach to a bank’s directors as well as the bank institutionally. It should be possible for individuals to sue board members and senior executives for recklessness in lending and other activities.
5. Concentrate on assets:deposits as the most important financial ratio of the banks, with an absolute maximum of 100 per cent permitted to deposit-taking banks. This would be a prudential requirement, aimed at promoting stability, not a facet of monetary policy as it was in the 1950s and 1960s. There should be no ‘tiering’ of any regulatory ratios of the type introduced under the Basel II rules, which were already unsuitable three years after they were proposed in 2004.
6. There should be no ‘calibration’ of any prudential regulations against the prevailing state of the financial markets or the business cycle: any rule must be applicable identically at all times. This is an extension of the first proposal. However, the adjustment of monetary rules to fit changing requirements of the business cycle remains necessary and should not be ruled out.
7. Investment, merchant or ‘casino’ banks must be sharply reduced in size to become once again the junior members of the banking sector. They should be subject to strict limits on interbank activities too. These banks must be wholly separated from commercial and private lending and revert to a partnership basis, in which the partners have unlimited personal liability for any losses. That imposes a discipline that a PLC does not.
8. All derivative instruments – those that already exist as well as any that are invented in the future – should require approval by a licensing authority. (How would that authority be industry-independent? See coming ‘Roadmap’) Each licence would have a limited term and the proponent would have to satisfy the authority that the proposed instrument serves a useful purpose and does not risk any grave economic harm. In light of the huge problems faced by some small businesses which were sold unsuitable interest-rate swaps (one of the simplest kinds of derivative) before and during the crisis, the principle of caveat emptor is not appropriate. Make sure that financial derivatives are traded on exchanges as much as possible, without any banking groups or wholly or partly owned subsidiaries of them allowed to participate on these or any other exchanges. ‘Over-the-counter’ (off-exchange) derivatives may be traded by banks only with actual risk-facing non-financial clients, not with each other or with financial speculators or investors.
9. The ‘shadow banking’ sector, where it is distinct from banks themselves (e.g. in hedge funds and ‘dark pools’ of investment) is a big problem in itself, and needs to be brought firmly under regulation. This includes the need to bring lending by organisations other than banks (e.g. hedge funds and pension funds) into the regulatory fold.
10. There should be a general reintroduction of capital controls designed, among other things, to sharply reduce international flows of money between banks except where they are required by the needs of international trade or (in the right circumstances) corporate investment. They are also essential tools in the prevention of ‘regulatory arbitrage’ and the use of tax havens. The important questions are not whether capital controls should be allowed, but what types of control are required. Decisions on this should be up to individual governments due to national sovereignty, and so as to avoid the long delays that would arise in reaching any international standards.
11. Banks and financial institutions should be accountable to a wider range of stakeholders, including depositors, lower-level employees, those lent to, possibly with some weighting for the level of financial stake. Non-corporate (non-PLC) forms of ownership, such as mutual societies and partnerships, should be officially encouraged.
12. Banks must be required to reimburse central government more fairly for depositor guarantees.
13. The government’s customer deposit guarantees should be reduced, perhaps to 90 per cent of the value of each deposit, while keeping a strict maximum value of the guarantee, currently set at £85,000.